Tuesday, September 11, 2012

John Hussman Fears a Crash

From the Hussman Funds:

Late-Stage, High-Risk

For investors who don’t rely much on historical
research, evidence, or memory, the exuberance of the market here is
undoubtedly enticing, while a strongly defensive position might seem
unbearably at odds with prevailing conditions. For investors who do
rely on historical research, evidence, and memory, prevailing conditions
offer little choice but to maintain a strongly defensive position.
Moreover, the evidence is so strong and familiar from a historical
perspective that a defensive position should be fairly comfortable
despite the near-term enthusiasm of investors.

There are few times in history when the S&P
500 has been within 1% or less of its upper Bollinger band (two
standard deviations above the 20-period moving average) on daily,
weekly and monthly resolutions; coupled with a Shiller P/E in excess of
18 – the present multiple is actually 22.3; coupled with advisory
bullishness above 47% and bearishness below 27% - the actual figures
are 51% and 24.5% respectively; with the S&P 500 at a 4-year high
and more than 8% above its 52-week moving average; and coupled, for good
measure, with decelerating market internals, so that the
advance-decline line at least deteriorated relative to its 13-week
moving average compared with 6-months prior, or actually broke that
average during the preceding month. This set of conditions is
observationally equivalent to a variety of other extreme syndromes of
overvalued, overbought, overbullish conditions that we've reported over
time. Once that syndrome becomes extreme - as it has here - and you get
any sort of meaningful "divergence" (rising interest rates,
deteriorating internals, etc), the result is a virtual Who's Who of
awful times to invest.

Consider the chronicle of these instances in
recent decades: August and December 1972, shortly before a bull market
peak that would see the S&P 500 lose half of its value over the
next two years; August 1987, just before the market lost a third of its
value over the next 20 weeks; April and July 1998, which would see the
market lose 20% within a few months; a minor instance in July 1999
which would see the market lose just over 10% over the next 12 weeks,
and following a recovery, another instance in March 2000 that would be
followed by a collapse of more than 50% into 2002; April and July 2007,
which would be followed by a collapse of more than 50% in the S&P
500, and today...MORE